Ideasroom

Value-based pricing more than a discount

The crisis we are experiencing is the equivalent of an earthquake in how it's impacting traditional go-to-market approaches and established value-based pricing. Here's why it's worth paying attention. 

During a period of economic recession or a shock like Covid-19, the typical response from retailers is slash and discount.

This seems obvious when, with no international arrivals, demand has virtually disappeared in industries such as tourism and foot fall has dramatically fallen elsewhere.

One of the consequences of Covid-19 is many consumers say they will never pay full price again and others’ expectations about generous and near-constant discounts have sharpened.

Thus, millions of consumers now want to beat the retailer and will happily share details of any savvy purchases to demonstrate their commercial expertise. Indeed, consumers probably accrue social status through intelligent purchasing, and if the notion of cut-price shopping once carried any sense of stigma, this has long since been shed.

Never have consumers been better equipped to pinpoint the most competitive deals.

Price comparison and the special deal

Smartphones, price comparison and review sites and group buying services are just some of the tools helping us to locate choice discounts with relative ease. For example, GrabOne’s daily offering.

The notion of price has become flexible – it is something to be manipulated, played with and, ultimately, challenged. Although price used to be fixed, it is now very much in flux. Consumers have become accustomed to ‘flash’ sales, time-limited offers and fluid prices, which can be subject to change from day to day or even hour to hour. Price is a mere starting point for negotiation.

Even when the troubled economic conditions of the early 2020s settle, behaviour learnt during the downturn will not disappear. Simply put, smart shopping makes too much sense to be abandoned. The clamour for discounts will therefore not diminish.

Value-based pricing

Going beyond a ‘slash and discount’ approach is about understanding value when demand is falling.

Value-based pricing is a strategy that sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices.

It is also referred to as an exchange between value and price. Customers make sacrifices and choices based on the benefits or utility they receive from the products or services in exchange for the price they pay.

This notion of exchange is essential whether value-based pricing is done manually or dynamically using AI-based algorithms.

The crisis we are experiencing is impacting traditional go-to-market approaches and challenging established value-based pricing approaches. It is the equivalent of an earthquake and requires paying attention to the following things:

Drops in customer sentiments and optimism in general: the natural reaction for customers is to protect cash, slow down on expenses and hunker down in case it gets worse.

Changes in perceptions of value for money: when uncertainty arises, customer perceptions of what is valuable and worth spending on are often shaken up. Customers go through more rational analysis of value for money and second-guess their purchasing decisions.

Changes in the importance of drivers of value: More rational decision making leads to better rationalisation of what is important to a household or business. Emotional value drivers might take a backseat position for a while.

Impact on willingness-to-pay for non-critical purchases: As customers rationalise their purchasing decisions, they might be inclined to question pricing and reduce their willingness to pay.

Openness to make further sacrifices in the quality they receive: Customers might be willing to lower their quality requirements to save. They might switch to a lower quality brand or accept lower performance for a while.

Emergence of irrational or emotional value drivers: Crises trigger some customers to stock up on items or to buy on impulse based on what they feel or sense is happening in the market.

Companies doing value-based pricing need to adapt to the current situation, anticipate the impact of the crisis and dynamically adjust their go-to-market strategies by:

Refreshing customer segmentation analysis to consider shifts in customer value perceptions and needs.

Monitoring changes in customer preferences and relative value perceptions through market and customer research.

Refreshing their value maps and value models to integrate changes in competitive position and the relative importance of top value drivers.

Revisiting their versioning and packaging strategies to respond to the emergence of new customers and changes in consumption patterns.

Introducing new offers and new business models to match new pockets of customer demands with the right pricing models (subscription, low prices, bundles, etc).

Equipping their sales teams with a refreshed value proposition and rules of engagement when they receive requests for price concessions.

Value-based pricing is an advanced and progressive pricing orientation. Managing and pricing for value is hard in normal times. It is even harder during times of economic turmoil. So it is all hands on deck for those companies that have put customer value at the heart of their go-to-market strategies.

Associate Professor Ian Yeoman is Editor of the Journal of Revenue and Pricing Management. He and Dr Stephan M Liozu are among those taking part in a Wellington School of Business and Government webinar on post-Covid-19 value-based pricing on Wednesday 22 July at 1pm. Register here.

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